Preferred Bank Reports Fourth Quarter Results

Published 5:11 PM ET Wed, 22 Jan 2014
Globe Newswire

LOS ANGELES, Jan. 22, 2014 (GLOBE NEWSWIRE) -- Preferred Bank (Nasdaq:PFBC), an independent commercial bank focusing on the diversified California market, today reported results for the quarter and year ended December 31, 2013. Preferred Bank ("the Bank") reported net income of $5.9 million or $0.44 per diluted share for the fourth quarter of 2013. This compares to net income of $4.9 million or $0.37 per diluted share for the fourth quarter of 2012 and compares to net income of $5.0 million or $0.37 per diluted share for the third quarter of 2013. Net income for the year was $19.2 million or $1.42 per diluted share. This compares to net income of $23.9 million or $1.78 per diluted share for 2012. Results for 2012 were aided by a $20.2 million reversal of the Bank's valuation allowance on its deferred tax asset. Pre tax income for 2013 was $31.5 million compared to $3.3 million for 2012.

Highlights from the fourth quarter of 2013:

Quarterly net income reached $5.9 million

OREO disposition activities resulted in a net gain of $2.2 million.

Linked quarter loan growth was $40.0 million

The net interest margin remained strong at 3.85%.

ROA of 1.33%

ROE of 10.71%

Continued reduction of non-performing assets, which now comprise only 0.80% of total assets (excluding loans held for sale)

Efficiency ratio declined to 32.6%

Li Yu, Chairman and CEO commented, "We are very pleased to report continued loan growth, deposit growth and further improvements in efficiency during the fourth quarter of 2013. This resulted in net income of $5.9 million or $0.44 per diluted share compared to net income of $5.0 million or $0.37 per diluted share just one quarter ago.

"Nonperforming asset ("NPA") levels continue to decline. As of December 31, 2013, total NPA's were $14.1 million (excluding loans held for sale) compared to $23.3 million at September 30, 2013 for a reduction of $9.2 million or 39.3%. Furthermore, these NPA dispositions resulted in a net gain of $2.2 million.

"During the quarter, we also elected to divest our investment portfolio of the three trust preferred CDO's which would have been prohibited holdings under the (early December 2013) version of the Volcker Rule of the Dodd-Frank Act. In addition, we also elected to sell other investment securities which were most sensitive to rising long term interest rates. The former resulted in a loss of $364,000 and the latter resulted in a loss of $741,000.

"New loan production for the quarter was slightly less than what we achieved in the third quarter but growth was still satisfactory considering the holiday season. Deposit growth, however, exceeded loan growth and when added to the disposition of securities and NPA's, our cash balances increased substantially and thus caused our net interest margin to compress slightly but still remain at a comfortable 3.85%.

"For the year 2013 we are pleased to report net income of $19.2 million or $1.42 per diluted share compared to $23.9 million or $1.78 per diluted share for 2012 (2012 net results were aided by a $20.2 million tax benefit). Measured on a pre-tax basis, we earned $31.5 million in 2013 as compared to $3.3 million in 2012. With the substantial improvement in NPA's, we believe the Bank has fully recovered from the prior credit cycle and our earnings are now exceeding peer averages.

"In 2013, we also achieved:

Loan growth of $199 million or 17.5%

Deposit growth of $172 million or 12.7%

OREO reduction of $22.7 million or 80.2%

NPL reduction of $10.5 million or 55.2%

Maintained the net interest margin at 3.95%, relatively flat from 2012 in a margin compressing environment

Efficiency ratio improved from 59.7% to 45.7%

Increase in total assets from $1.55 billion to $1.77 billion, or 14.0%

Total equity capital increased $19.1 million from 2012

"In 2013, the Southern California housing market saw an impressive recovery. Rental vacancies have declined, tourism activity has increased substantially, export activity at the ports of Los Angeles and Long Beach are operating at their highest levels and California State's finances have improved. At this time, we do not see any significant economic headwinds in the near future and our staff is well-prepared to take advantage of market expansion opportunities in 2014.

"Our loan portfolio consists of approximately 86% adjustable rate loans. Of the remaining 14%, most of that is either matched off with CD's or FHLB advances. Our balance sheet is in a very strategically advantageous position to capitalize on rising interest rates.

"Management would like to continue to express our optimistic outlook which we have maintained since the end of 2012. We believe that we will be able to continue to execute our plan in 2014."

Fourth Quarter

Operating Results

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $16.4 million compared to $14.2 million recorded in the fourth quarter of 2012 and a slight decrease from the $16.5 million recorded in the third quarter of 2013. The increase over 2012 is due primarily to loan growth and the decrease from the prior quarter was mainly due to an increase in interest expense as well as a decrease in investment income. The Bank's taxable equivalent net interest margin was 3.85% for the fourth quarter of 2013, a 6 basis point decrease from the 3.91% achieved in the fourth quarter of 2012 and a 25 basis point decrease from the 4.10% recorded in the third quarter of 2013. The decrease in the margin was primarily due to average cash balances which were $69 million higher in the fourth quarter versus the third quarter of 2013 and $38 million higher than in the fourth quarter of 2012. These cash balances only earn 0.25% so the level of cash on the balance sheet has a significant impact on the calculated margin.

Noninterest Income. For the fourth quarter of 2013, noninterest income was $214,000 compared with $749,000 for the same quarter last year and compared to $213,000 for the third quarter of 2013. Noninterest income was negatively impacted this quarter by a loss on sale of securities of $1.1 million and by $497,000 in the third quarter of 2013. Of the losses on securities, $364,000 was due to the sale of the Bank's trust preferred CDO's (TruP) which were divested in conjunction with the implementation of the final Volcker Rule. The remaining securities losses were the sales of longer dated securities which within the portfolio had the most sensitivity to higher interest rates. Service charges on deposits was up in the fourth quarter compared to last year and compared to the third quarter of 2013. Other income was up significantly in the fourth quarter over both comparable periods due to a $514,000 gain on the sale of a note.

Noninterest Expense. Total noninterest expense was $5.4 million for the fourth quarter of 2013, down significantly from the $8.2 million recorded in the same period last year and $7.8 million for the third quarter of 2013. Salaries and benefits expense totaled $4.0 million for the fourth quarter of 2013 compared to $3.3 million for the same period last year and compared to $4.0 million for the third quarter of 2013. The increase over the fourth quarter of 2012 was due to higher bonus expense as well as higher staffing levels. Occupancy expense was $801,000 compared to the $753,000 recorded in the same period in 2012 and $833,000 recorded in the third quarter of 2013. The increase over 2012 was due primarily to the new San Francisco branch occupancy costs. Professional services expense was $899,000 for the fourth quarter of 2013 compared to $1.0 million for the same quarter of 2012 and $1.0 million recorded in the third quarter of 2013. Other real estate owned ("OREO") related and loans held for sale ("LHFS") expenses totaled $(2.1 million) for the fourth quarter of 2013 (consisting of $71,000 in operating expenses, valuation charges of $413,000 which were more than offset by net gains on sale of OREO of $2.6 million). This represented a significant decrease from the $1.7 million of expense recorded in the same quarter last year and a decrease from the $73,000 posted in the third quarter of 2013. Other expenses were $1.5 million in the fourth quarter of 2013, an increase of $466,000 over the same period in 2012 and flat compared to the third quarter of 2013. The variance compared to the same period last year was primarily due to $188,000 of charges related to the depreciation of the Bank's investment in a Low Income Housing Tax Credit fund.

Income Taxes

The Bank recorded a provision for income taxes of $3.5 million for the fourth quarter of 2013. This represents an effective tax rate ("ETR") of 37.6% for the quarter. The provision for income taxes (and thus the ETR) were increased by a $122,000 adjustment to the Bank's deferred tax asset ("DTA"). This adjustment to the DTA was due to the sale of the Bank's CDO's as the Bank had recognized a tax benefit on prior other than temporary impairment losses on the securities which could not be fully realized.

Year Results

Highlights for 2013:

Pre tax income of $31.5 million

OREO balances declined from $28.3 million to $5.6 million.

Loan growth reached $198.6 million, or 17.5%

The net interest margin held relatively flat at 3.95%.

ROA of 1.18%

ROE of 9.75%

Efficiency ratio declined to 45.7%

Operating Results

For the year ended December 31, 2013, the Bank reported net income of $19.2 million or $1.42 per diluted share as compared to $23.9 million or $1.78 per diluted share for 2012. Results for 2012 were significantly aided by a $20.2 million reversal of the Bank's valuation allowance on its deferred tax asset. Pre tax income for 2013 was $31.5 million compared to $3.3 million for 2012. The substantial improvement in pre tax earnings from 2012 to 2013 was due to better performance in nearly all areas of the income statement. Net interest income increased, the provision for loan losses decreased and non-interest expense decreased.

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $62.0 million compared to $53.8 million recorded in 2012. This represents an increase of $8.2 million or 15.3% and was primarily due to the increase in total loans from year to year. Interest income on investments was down from 2012 by $162,000 due to a decrease in total average investment securities as the Bank sold certain securities during the year in order to reduce interest rate risk. Even though total deposits grew by $171.8 million in 2013, interest expense was down slightly in 2013 due to the continued decline on rates paid on deposits. The Bank's taxable equivalent net interest margin was 3.95% for 2013, relatively flat from the 3.96% achieved in 2012. Although yields on earning assets declined year over year by 9 basis points, the Bank's cost of funds declined by 16 basis points from 2012.

Noninterest Income. For 2013, noninterest income was $2.0 million compared with $3.5 million in 2012. This decrease was due to losses on sales of investment securities of $1.96 million recorded in 2013. During the course of 2013, management elected to sell $37.2 million of securities which had the most price sensitivity to rising rates. On these sales, the Bank incurred losses of $1.6 million. In December of 2013, after the final Volcker Rule was released, management elected to divest of the three trust preferred CDO's ($1.9 million book value) at a loss of $361,000. Service charges on deposits totaled $2.1 million in 2013 compared to $1.8 million in 2012. Trade finance income was also up during 2013, posting an increase of $303,000 or 98.2% due to a large increase in letter of credit origination. Other income for 2013 was $916,000, an increase of $413,000 over 2012. This was due primarily to a $514,000 gain on the sale of a note.

Noninterest Expense. Total noninterest expense for 2013 was $29.3 million, down significantly from the $34.2 million recorded in 2012. Salaries and benefits expense totaled $16.2 million compared to $12.5 million for 2012. The increase over 2012 was due to higher bonus expense as well as higher staffing levels due to the new San Francisco branch as well as additions to business development and support staff over the course of 2013. Occupancy expense was $3.2 million compared to the $3.0 million recorded in 2012 and the increase was due primarily to the new San Francisco branch occupancy costs. Professional services expense was $3.6 million in 2013 compared to $3.2 million in 2012 and the $370,000 increase was primarily due to an increase in legal expenses. Other real estate owned ("OREO") related and loans held for sale ("LHFS") expenses totaled $(449,000) for 2013 (consisting of $563,000 in net operating expenses, OREO valuation charges of $2.0 million and LHFS valuation charges of $775,000 which were more than offset by net gains on sale of OREO of $3.8 million). This represented a significant decrease from the $9.0 million of expense recorded in 2012. Other expenses were $5.1 million in 2013, an increase of $123,000 over 2012 and was primarily due to $376,000 of charges related to the depreciation of the Bank's investment in a Low Income Housing Tax Credit fund.

Balance Sheet Summary

Total gross loans and leases (including loans held for sale) at December 31, 2013 were $1.33 billion, an increase of $198.6 million or 17.5% over the total of $1.13 billion as of December 31, 2012. The tables below indicate loans by type as compared to the end of 2012 as well as the end of last quarter:

Loans by Type – Year over Year (ooo's)

Loan Type (000's)

December 31, 2013

December 31, 2012

$ Change

% Change

R/E – Residential/Multifamily

$ 228,490

$ 152,388

$ 76,102

49.9%

R/E – Land

21,368

27,158

(5,790)

-21.3%

R/E – Commercial

621,681

493,101

128,580

26.1%

R/E – Construction

73,602

74,410

(808)

-1.1%

Commercial & Industrial

378,965

372,496

6,469

1.7%

Loans Held for Sale

6,207

12,150

(5,943)

-48.9%

Total

$ 1,330,313

$ 1,131,703

$ 198,610

17.5%

Loans by Type – Quarter over Quarter (ooo's)

Loan Type

December 31, 2013

September 30, 2013

$ Change

% Change

R/E – Residential/Multifamily

$ 228,490

$ 197,119

$ 31,371

15.9%

R/E – Land

21,368

10,709

10,659

99.5%

R/E – Commercial

621,681

610,764

10,917

1.8%

R/E – Construction

73,602

66,044

7,558

11.4%

Commercial & Industrial

378,965

394,328

(15,363)

-3.9%

Loans Held for Sale

6,207

11,329

(5,122)

-45.2%

Total

$ 1,330,313

$1,290,293

$ 40,020

3.1%

Total deposits as of December 31, 2013 were $1.53 billion, an increase of $171.8 million from the $1.36 billion at December 31, 2012. In the early part of 2013, the Bank elected to reduce DDA deposits which would have required collateral of government securities to maintain. The process of reducing these deposits finalized in the third quarter as evidenced by the stabilization of those balances. As of December 31, 2013 compared to December 31, 2012: noninterest-bearing demand deposits decreased by $108.2 million or 24.2%, interest-bearing demand and savings deposits increased by $146.1 million or 42.1% and time deposits increased by $133.9 million or 23.7%. In reviewing the quarter, total deposits increased $59.2 million or 4.0%. Total demand deposits were flat at $339 million, interest bearing demand and savings deposits increased from $432.5 million to $493.0 million, an increase of $60.4 million or 14.0%. Total certificates of deposit decreased slightly from $699.0 million to $697.8 million quarter to quarter. Total assets were $1.77 billion, a $217.9 million or 14.0% increase from the total of $1.55 billion as of December 31, 2012.

Asset Quality

As of December 31, 2013 total nonaccrual loans (excluding loans held for sale) decreased to $8.5 million compared to $19.0 million as of December 31, 2012. Total net charge-offs (recoveries) for the fourth quarter of 2013 were $(25,000) compared to net charge-offs of $867,000 for the third quarter of 2013. The Bank recorded a provision for loan losses of $1.8 million for the fourth quarter of 2013. Although nonperforming loan and economic trends continue to be positive, management believes that this provision is appropriate in order to maintain an allowance level deemed sufficient. This compares to a provision of $2.3 million in the fourth quarter of 2012 and $1.2 million in the third quarter of 2013. The allowance for loan loss at December 31, 2013 was $20.2 million or 1.52% of total loans compared to $20.6 million or 1.84% of total loans at December 31, 2012.

NPA Migration

Non-Performing Assets Migration – Q4 2013

Non Accrual Loans

OREO

Balance, September 30, 2013

$ 11,340

$ 11,936

Additions

47

--

Transfer to OREO

--

--

Loans Cured

--

--

Sales/Payoffs

(2,874)

(6,221)

Charge-off

--

(113)

Balance, December 31, 2013

$ 8,513

$ 5,602

NPA Migration

Non-Performing Assets Migration – YEAR 2013

Non Accrual Loans

OREO

Balance, December 31, 2012

$ 18,995

$ 28,280

Additions

6,197

--

Transfer to OREO

--

--

Loans Cured

--

--

Sales/Payoffs

(11,566)

(20,973)

Charge-off

(5,113)

(1,705)

Balance, December 31, 2013

$ 8,513

$ 5,602

The tables above exclude loans held for sale and TDR's that are on accrual status. Performing TDR's totaled $403,000 as of December 31, 2013. The $6.2 million in loans held for sale consist of one nonaccrual loan for $6.2 million.

OREO

Total OREO decreased to $5.6 million compared to $28.3 million as of December 31, 2012. During the fourth quarter of 2013, the Bank's OREO disposition efforts resulted in a net gain of $2.2 million.

Capitalization

As of December 31, 2013, the Bank's tier 1 leverage ratio was 12.38%, the tier 1 risk based capital ratio was 13.78% and the total risk-based capital ratio was 15.03%. This compares to 11.96%, 13.73% and 14.98% as of December 31, 2012, respectively.

Conference Call and Webcast

A conference call with simultaneous webcast to discuss Preferred Bank's fourth quarter 2013 financial results will be held tomorrow, January 23, at 2:00 p.m. Eastern / 11:00 a.m. Pacific. Interested participants and investors may access the conference call by dialing 800-762-8779 (domestic) or 480-629-9645 (international). The passcode for the call is 4660880. There will also be a live webcast of the call available at the Investor Relations section of Preferred Bank's website at www.preferredbank.com. Web participants are encouraged to go to the website at least 15 minutes prior to the start of the call to register, download and install any necessary audio software.

Preferred Bank's Chairman and CEO Li Yu, President and COO Wellington Chen, Chief Financial Officer Edward J. Czajka and Chief Credit Officer Louie Couto will be present to discuss Preferred Bank's financial results, business highlights and outlook. After the live webcast, a replay will remain available in the Investor Relations section of Preferred Bank's website. A replay of the call will also be available at 800-406-7325 (domestic) or 303-590-3030 (international) through January 30, 2014; the passcode is 4660880.

About Preferred Bank

Preferred Bank is one of the larger independent commercial banks in Southern California with a multi-ethnic focus. The bank is chartered by the State of California, and its deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the maximum extent permitted by law. The Bank conducts its banking business from its main office in Los Angeles, California, and through ten full-service branch banking offices in Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Anaheim, Pico Rivera and San Francisco, California. Preferred Bank offers a broad range of deposit and loan products and services to both commercial and consumer customers. The Bank provides personalized deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses, entrepreneurs, real estate developers, professionals and high net worth individuals.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the Bank's future financial and operating results, the Bank's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of the Bank's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: changes in economic conditions; changes in the California real estate market; the loss of senior management and other employees; natural disasters or recurring energy shortage; changes in interest rates; competition from other financial services companies; ineffective underwriting practices; inadequate allowance for loan and lease losses to cover actual losses; risks inherent in construction lending; adverse economic conditions in Asia; downturn in international trade; inability to attract deposits; inability to raise additional capital when needed or on favorable terms; inability to manage growth; inadequate communications, information, operating and financial control systems, technology from fourth party service providers; the U.S. government's monetary policies; government regulation; environmental liability with respect to properties to which the bank takes title; and the threat of terrorism. Additional factors that could cause the Bank's results to differ materially from those described in the forward-looking statements can be found in the Bank's 2012 Annual Report on Form 10-K filed with the Federal Deposit Insurance Corporation which can be found on Preferred Bank's website. The forward-looking statements in this press release speak only as of the date of the press release, and the Bank assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those contained in the forward-looking statements. For additional information about Preferred Bank, please visit the Bank's website at www.preferredbank.com.